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Stocks & Indexes

By Colin Twiggs
October 21, 2006 0:30 a.m. ET (2:30 p.m. AET)

These extracts from my daily trading diary are for educational
purposes and should not be interpreted as investment advice.
Full terms and conditions can be found at
Terms of Use.
The next newsletter (an update on Gold, Crude Oil and the
Dollar) will be on October 17th.

The Big Picture

Crude oil confirmed its break below support at $60/barrel and
appears headed for a test of $55. Gold retreated to $591 and
appears headed for a test of primary support at $540, while the
dollar continues to range between $1.245 and $1.300 against the
euro.

According to the Wright
model, the probability of recession in the next four
quarters remains a moderate 39 per cent.

USA

The Dow Industrial Average
encountered resistance at 12000, forming another bullish
narrow consolidation. However, the
long-legged doji on Friday, accompanied by strong volume,
warns that resistance is not yet subdued. Reversal below
Tuesday's low would be a bearish sign, while a rise above
Wednesday's high would indicate that the up-trend is likely to
continue.

Medium Term: The index is well above its 100-day
moving average, sign of a strong up-trend, and the large
upward spike on
Twiggs Money Flow (21-day) signals strong accumulation. The
target for the breakout is 12700 (calculated as 11650 + {11650
- 10700}).

Long Term: The Dow is in a primary up-trend, with
support at 10700.

The Dow Jones Transportation Average is headed for a
test of its May high of 5000. A break above this level would
signal reversal to a primary up-trend and confirm the existence
of a
bull market.

The Nasdaq Composite Index is testing its April high of
2370; the latest short retracement being a bullish sign. The
index is well above its 100-day moving
average and
Twiggs Money Flow (21-day) trending upwards while above
zero signals strong
accumulation. Breakout above resistance would have a target
of 2720 (calculated as 2370 + {2370 - 2020}).

The S&P 500 is headed for a test of the upper border
of the linear regression channel. The target for the latest
rally is still some way off at 1425 (calculated as 1325 + {1325
- 1225}). Breakout above the upper border of the channel may
indicate a stronger up-trend, but we are just as likely to see
a retracement test the central linear regression line.

LSE United Kingdom

The FTSE 100 encountered short-term resistance at 6180
after breaking above its April high of 6130. The narrow
consolidation is a bullish sign, indicating that there are
sufficient buyers to prevent retracement below the new support
level.

Nikkei Japan

The Nikkei 225 retraced to test support at 16500. A rise
above Monday's high of 16700 would again confirm the
up-trend.

Medium Term: The index has formed a trend channel
(plotted at 2 standard deviations around the linear regression
line) and appears headed for a test of the upper channel line.
Twiggs Money Flow (21-day) is improving, but will only
offer a strong signal if the latest trough above zero [+] is
completed by a new high.

Long Term: The index is in a primary up-trend, with
support at 14200, and appears headed for a test of the April
high of 17500.

ASX Australia

The All Ordinaries encountered resistance at 5300 (from
the May high), forming a bullish
narrow consolidation. The break above 5300 is marginal at
this stage -- a retracement that respects 5300 (from above)
would be a stronger bull signal.

The actual May high was 5352 and the highest close was 5318; so
we are likely to encounter a band of resistance between 5300
and 5350 rather than a single line. The lower border of 5300,
however, is likely to provide the sternest test.

Medium Term: The index is testing the previous high of
5300/5350. A breakout would be likely to test the upper border
of the regression channel -- a target of 5800 (5300 + {5300 -
4800}).
Twiggs Money Flow (21-day) trending upwards above the zero
line signals long-term accumulation.

Long Term: The All Ordinaries is in a primary up-trend
with support at 4800.

Joy is not in things;
it is in us.

~ Richard Wagner (1813 - 1883)

Technical Analysis and Predictions

I believe that Technical Analysis should not be used to
make predictions because we never know the outcome of a
particular pattern or series of events with 100 per cent
certainty. The best that we can hope to achieve is a
probability of around 80 per cent for any particular
outcome: something unexpected will occur at least one in
five times.

My approach is to assign probabilities to each possible
outcome. Assigning actual percentages would imply a
degree of precision which, most of the time, is
unachievable. Terms used are more general: "this is a
strong signal"; "this is likely"; "expect this to
follow"; "this is less likely to occur"; "this is
unlikely"; and so on. Bear in mind that there are times,
especially when the market is in equilibrium, when we may
face several scenarios with fairly even
probabilities.

Analysis is also separated into three time frames: short,
intermediate and long-term. While one time frame may be
clear, another could be uncertain. Obviously, we have the
greatest chance of success when all three time frames are
clear.

The market is a dynamic system. I often compare trading
to a military operation, not because of its' oppositional
nature, but because of the complexity, the continual
uncertainty created by conflicting intelligence and the
element of chance that can disrupt even the best made
plans. Prepare thoroughly, but allow for the unexpected.
The formula is simple: trade when probabilities are in
your favor; apply proper risk (money) management; and you
will succeed.